The US Treasury’s DeFi ID Plan Is Kickstarting - Is There Anything Good in It?
DeFi can impact your life for the better. Will the government take that ability away? Who's seen Gattaca?
The US Treasury has issued an open call for the public to share their comments regarding the introduction of a digital identity that checks into DeFi smart contracts.
This open call, which began on August 18 and lasts until October 17, is part of the Treasury's GENIUS Act consultation on crypto compliance tools.
Thoughts Behind the DeFi ID
Decentralized Finance allows anyone to make private, unmarked, anonymous transactions. This allows fully fledged freedom for anyone to transact without being monitored.
Due to the need for crypto regulation, the GENIUS Act was signed into law in July and seeks to guide the Treasury in developing new compliance measures to fight illicit financial facilitation in the crypto industry.
The Treasury plans to embed identity credentials directly into smart contracts. This means any DeFi Protocol in the US would have to automatically verify biometrics, government IDs, or other certifications to map and match a digital wallet to its user.
Why This Matters: Pros vs Concerns
Objectives:
Treasury views a digital DeFi ID as a way to reduce compliance and enforcement costs, making it easier to detect illicit finance. The digital ID will also improve surveillance by conducting real-time verification before any transaction, thus being able to act even before the transaction is done.
For instance, if the US black balls certain regions, then no one in those regions would be able to transact with Americans via DeFi anymore.
Concerns:
The DeFi ID idea comes with several concerns. Here are some of them:
Privacy erosion: Critics are calling out this plan since the whole concept will reshape all the fundamental ethos of DeFi, like pseudonymity. Users will no longer be able to enjoy making transactions without being monitored, censored, or denied access altogether.
Exclusion risks: Some people stay unbanked to minimize their digital trails. This Treasury plan aims mainly to act as a “sieve” to ensure that only those who meet the merits set in the said smart contracts will be served. As a result, those who don’t enjoy government-facilitated banking services risk being excluded from DeFi.
Susceptibility to fraud: There have always been schemes to bypass legal parameters. For instance, major centralized exchanges have had their accounts traded away to be used to circumvent AML and KYC in given regions. In this case, DeFi IDs might end up exchanging hands and landing under the control of the people the Treasury is targeting to weed out.
Data security threats: Linking private data like biometrics, government IDs, or even licences will create a loophole that malicious actors can exploit to collect data.
Though many concerns exist, some can be easily mitigated through budding technologies like zero-knowledge proof and decentralized identity standards. Such technologies allow users to prove their identities without necessarily exposing them to anyone else.
How the DeFi ID Might Impact Your Crypto Life
Crypto was built to allow anyone to exchange financial value digitally via a blockchain without relying on third parties like banks. This process involves private crypto wallets with addresses that are basically strings of characters, meaning no personal data is attached to them.
As a result, anonymity is upheld, as no unique identifier is attached to the wallets and the individuals operating them. As such, you can transact without worrying that anyone is tracing your steps.
If the US Treasury succeeds in creating a DeFi ID, anonymity will be impacted significantly. Here are some of the effects that might be felt:
Anonymity is undermined
DeFi’s pseudonymity will be replaced with identity-linked transactions, which will strip away one of crypto’s foundational protections against mass surveillance.
Censorship risk is introduced
ID-tied access will allow wallets or users to be blocked, throttled, or blocklisted at the protocol level and at the discretion of the US government. This will enable the financial censorship that crypto was meant to resist and give the government even more control.
Marginalization & exclusion
Anyone without formal IDs (e.g., migrants, refugees, unbanked populations) will ultimately be locked out of DeFi, which recreates the same gatekeeping that crypto bypassed initially.
Trustlessness is compromised
Instead of “don’t trust, verify,” which crypto has been relying on, users will now need to trust centralized ID systems, governments, or intermediaries, weakening the core principle of decentralized trustlessness.
Data Risks Amplified
Tying immutable blockchain activity to sensitive personal IDs creates a permanent surveillance trail vulnerable to hacking, leaks, or misuse. This trail facilitates easier financial tracking, even by malicious actors, compromising privacy more than ever and undermining individual sovereignty over financial data.
Timelines and the Next Steps
Treasury is conducting the Public Consultation phase through October 17, 2025. During this period, it will collect feedback from crypto industry heads, privacy advocates, tech experts, financial institutions, and all other stakeholders.
After this phase, the Treasury will submit a report to Congress, which will then be used to formulate formal guidance or rules based on the findings.
Looking Forward
US Treasury is receiving widespread backlash over the DeFi ID, as critics find that it will limit and undermine the core principles of crypto.
What do you think about this turn of events, and should the US Congress approve it?
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